Variation to the MasterCard and Visa Access Regimes: Details-stage
Regulation Impact Statement – March 2014 1. Background

Participants in a card scheme (e.g. MasterCard and Visa) can be issuers or acquirers, or in most cases, both.[1] When a cardholder purchases goods from a merchant, the issuer undertakes to make payment for those goods (to the acquirer) and recoups the funds from the cardholder according to the terms of their agreement. Any entity that wishes to undertake card issuing and/or acquiring under the rules of a scheme is obliged to be a participant in that scheme. Conditions of access to card schemes therefore have the potential to affect competition and efficiency in the provision of card payment services.

Access to the MasterCard and Visa credit card systems in Australia was examined by regulators in the late 1990s and early 2000s.[2] At the time, scheme rules stipulated that only card issuers that were prudentially supervised or organised under local banking legislation were eligible to participate. In Australia, this meant that card issuers and acquirers had to be authorised deposit-taking institutions (ADIs) supervised by the Australian Prudential Regulation Authority (APRA). Card acquirers were also required to be issuers to be eligible, and penalties were imposed on institutions that were significant net acquirers (i.e. businesses that wished to focus on acquiring would be at a considerable disadvantage to those that both issued and acquired transactions).

It was recognised by the regulators that it was appropriate for card issuers to be of sound financial standing in order to ensure that issuers were able to meet their obligations and would not disrupt the credit card systems. It was also recognised that the ADI requirement had been an effective screening device for the schemes. However, it was found that participation criteria based on institutional status might have created higher barriers to entry than necessary. For instance, there did not appear to be good reasons to require that issuers be deposit takers; cards could be issued by non-financial institutions that were financially sound without adding settlement risks to the system. Likewise, there was no justification for the requirement that acquirers also had to be issuers. Furthermore, while there were desirable attributes of acquirers (e.g. processing capacity and the ability to bear chargeback costs), these did not require the acquirer to be an ADI.[3]

To address these concerns, the Reserve Bank worked closely with APRA to formulate a new class of ADIs – specialist credit card institutions (SCCIs) – to allow entities that are not deposit-takers to undertake issuing or acquiring activities in the MasterCard and Visa credit card systems. These entities would be subject to prudential supervision by APRA in a manner consistent with the risks they incur. The reform was put in place by extending the definition of ‘banking business’ under the Banking Act 1959 to include credit card issuing and acquiring in Australia in the designated MasterCard and Visa systems.[4] This allowed a wider range of prospective participants to be authorised by APRA as ADIs and to become eligible to participate in the card schemes.

As part of the same reforms, the Reserve Bank introduced access regimes for the MasterCard and Visa credit card systems in 2004 and for the Visa Debit system in 2005.[5] The intent of the Access Regimes was to strike an appropriate balance between controlling risk in the payments system and the increased competition and efficiency that would come from wider eligibility criteria for access to payment card issuing/acquiring. In particular, the effect of the Access Regimes is that any ADI (including an SCCI) is eligible to apply to participate in the MasterCard, Visa and Visa Debit systems in Australia, and that the schemes must not discriminate between types of ADIs when assessing applications for participation. The schemes are also prohibited from preventing a participant from being an issuer only, an acquirer only, or both an issuer and an acquirer. It is nonetheless up to the schemes to assess whether to admit an entity as a participant, subject to the requirements of the Access Regimes.

Since the introduction of these arrangements, only two entities have gained SCCI status; a third entity has recently indicated that it has received in-principle approval to become an SCCI. Developments since the original access reforms suggest the need for considering whether the current access arrangements continue to strike an appropriate balance between new entry and risk in those systems.

Box A: Credit card transactions – key concepts

A typical credit card transaction (Figure 1) involves four parties – the cardholder, the cardholder's financial institution (the issuer), the merchant, and the merchant's financial institution (the acquirer).[6]

Figure 1: Flows in a Stylised Credit Card Transaction

When the cardholder presents a card to the merchant, and authorises the transaction (for example, by the use of signature or a PIN), the merchant provides the relevant goods or services to the cardholder. The merchant has not at this time received funds from the cardholder; rather, the authorisation of the transaction implies a series of flows of funds that will occur later. The issuing institution makes payment to the acquirer, and the latter provides funds to the merchant – usually this occurs after settlement of the issuer's obligations to the acquirer, but there is nothing to prevent an acquirer providing value to the merchant earlier in the transaction. Finally, the issuer will provide a statement to the cardholder, reflecting this transaction and any others during the statement period, and require payment from the cardholder. Where the cardholder makes payment to the issuer of the full amount owing within a specified period, the transaction may be ‘interest-free’ for the cardholder. If the full amount is not paid off, or where no interest-free period is offered, interest on the balance will be charged.

The credit card scheme operators, MasterCard and Visa, are not parties to the transactions, but: establish the rules under which the payments are exchanged; provide the network that allows payment messages to be transmitted between issuers and acquirers; and licence card numbers to issuers. Issuers and acquirers must be members of a scheme in order to directly provide the branded payment services of that scheme.

Footnotes

Card issuers provide individuals or businesses cards to make payments, maintain accounts associated with those cards and undertake other activities that enable payments to be made (e.g. authorising payments, and clearing and settling payment obligations with acquirers arising from the use of those cards). Card acquirers provide merchants with facilities to accept card payments and also undertake similar activities (e.g. clearing and settling the resulting obligations with card issuers). See Box A for a description of the basic concepts in a credit card transaction. [1]

See Financial System Inquiry (Wallis Committee) (1997), Financial System Inquiry Final Report, Australian Government Publishing Service, Canberra, pp 399–400, available at <http://fsi.treasury.gov.au/content/FinalReport.asp> and Reserve Bank of Australia and Australian Competition and Consumer Commission (2000), Debit and Credit Card Schemes in Australia: A Study of Interchange Fees and Access, October, available at <https://www.rba.gov.au/payments-and-infrastructure/resources/publications/payments-au/interchg-fees-study.pdf>. [2]

While merchants would have to hold their deposits with an ADI, this need not be their acquirer. [3]

See Regulation 4 of the Banking Regulations 1966. [4]

The Access Regime for the Visa Debit System was introduced at the request of Visa, which advised the Reserve Bank that the scheme's international rules might be preventing SCCIs from joining the system and that an SCCI intending to acquire both Visa credit and debit card transactions might not be able to join the scheme. An access regime was also imposed on the Bankcard system; however, Bankcard ceased operation in 2006. The Access Regimes for the MasterCard, Visa and Visa Debit systems are available at: <https://www.rba.gov.au/payments-and-infrastructure/payments-system-regulation/regulations.html>. [5]

This description abstracts from fees associated with the provision of payment services, including interchange fees. [6]